Washington Tax Insight March 2021
Politics and Congressional Activity
Congress has approved, and the President has signed the American Rescue Plan, which is a $1.9 trillion tax-and-spending package to address the continuing health and economic impacts of the COVID-19 pandemic. The final version of the bill passed the Senate on March 6th by a vote of 50-49 and passed the House on March 10th by a slim margin. Democratic leaders met their goal of enacting the legislation before March 14th when the current extension of enhanced federal unemployment insurance benefits was set to expire.
The Biden Administration is expected to now move on to proposing its “Build Back Better” economic recovery legislation, which will focus on economic stimulus and infrastructure. That legislation is likely to include several revenue-raising proposals including increased corporate tax rates, tax increases on high-income individuals, international tax law changes, and other business tax proposals. Although there has been speculation that there will be consideration of moving this legislation through the budget reconciliation process, there is also likely to be challenges to doing so, including from some Senate Democrats who have already expressed opposition to another key piece of legislation that does not have bipartisan support.
The “Build Back Better” economic recovery legislation is likely to include three key areas of the Biden agenda: Infrastructure investments, Green Energy, and manufacturing incentives. It is also expected to build on the individual economic relief included in the American Rescue Plan and include a number of the tax proposals Biden supports that will increase taxes on individuals and businesses. Finally, Congress and the Administration will have to address the package of tax extenders that arise every year with respect to those tax provisions that are not permanent.
House of Representatives/Ways & Means Committee
Ways & Means Committee: Committee members have formally approved subcommittee chairs and assignments for the 117th Congress. The new chair of the Select Revenue Measures Subcommittee, which deals with tax issues, will be Representative Mike Thompson (D-CA) with Representative Adrian Smith (R-NEB) named to be the Ranking Member.
Chair Neal (D-MA) stated in remarks at a recent conference that a retroactive tax rate increase on US corporations is unlikely to be part of comprehensive tax reform legislation that Democrats are interested in working on once the pandemic recedes. Although he discussed the possibility of a corporate tax rate increase, he was not specific about what he thought that increase should be. He said that once Congress completes work on the new COVID-relief legislation, the Ways & Means Committee will start work on infrastructure legislation, which will include tax incentives for renewable energy and energy efficiency to combat climate change, a revival of the Build America Bonds program and expansions of the low-income housing tax credit, and new markets tax credit programs.
Chair Bill Pascrell (D-NJ) of the Oversight Subcommittee along with several other Democratic House members, introduced legislation that generally would end capital gain treatment for income from carried interests, “The Carried Interest Fairness Act of 2021.” Capital gain treatment would continue to apply for individuals who truly put money at risk, such as private-equity partners who invest their own money in their funds, but all income from managing a firm’s assets would be taxed at ordinary rates.
Senate/Senate Finance Committee:
Senate Finance Committee: Chair Ron Wyden (D-OR) has stated that one of the priorities for the SFC this year will be to focus on combating long-standing economic failures and racial inequalities in the US, such as the wage gap faced by people of color. Senator Elizabeth Warren (D-MA) has joined the tax-writing committee. In announcing her appointment to the Committee, Chair Wyden commented that “income inequality will be a major focus of my legislative and investigative work, and Senator Warren will certainly play a significant role in advancing this agenda.” Senator Warren announced that her first order of business as a new member of the SFC would be to introduce legislation for a wealth tax on fortunes above $50 million.” Republicans are also expected to name a new member of the SFC.
COVID-19 Relief Legislation – The American Rescue Plan
Congress has approved, and the President has signed the American Rescue Plan, which is a $1.9 trillion tax-and-spending package to address the continuing health and economic impacts of the COVID-19 pandemic. Democratic leaders met their goal of enacting the legislation before March 14th when the current extension of enhanced federal unemployment insurance benefits was set to expire.
The American Rescue Plan, which is the first major legislative accomplishment of the Biden Administration, was advanced through Congress using the budget reconciliation procedure with final approval in the Senate coming along party lines and final approval in the House by a very slim margin.
The final bill did not include a proposal to increase the minimum wage to $15 per hour by 2025 because the Senate parliamentarian ruled that it did not meet the requirements of the Senate budget reconciliation rules under which the legislation was being considered. The legislation did include additional direct economic payments to individuals, enhanced tax credits for families, workers, and businesses, and an extension of enhanced unemployment benefits.
The American Rescue Plan includes several provisions that assist businesses in dealing with the pandemic by expanding and/or extending assistance enacted in earlier COVID-19 relief bills, including the Employee Retention Credit. It also includes a package of pension-related changes. The bill includes:
- Expand and extend the Employee Retention Credit through 2021;
- Increase the exclusion for employer-provided dependent care assistance for 2021 from $5,000 to $10,500 (and from $2,500 to $5,250 for a married person filing separately);
- Expand and extend credits for paid family and medical leave through September 30, 2021;
- Exclusions from gross income for Economic Injury Disaster Loan grants and Restaurant Revitalization grants, along with a clarification that these exclusions would not result in a denial of business deductions, a reduction of tax attributes, or a denial of increase in tax basis;
- Provisions to shore up financially struggling multiemployer plans and single-employer pension plans
The American Rescue Plan includes a package of revenue-raising provisions designed to offset a portion of the revenue loss created by the overall bill. Those provisions include:
- Prevent companies from allocating interest expenses on a worldwide basis beginning in 2021;
- Lower to $600 the threshold transaction amount that third party settlement organizations must report under section 6050W(e);
- Extend the tax rules for excess business loss limitations under section 461 for an additional year; and
- Modify section 162(m) to prevent publicly traded companies from deducting the compensation of their ten highest-paid executives
Maryland Digital Advertising Tax: Maryland becomes the first state to enact a new tax on digital advertising sold by large online companies. The state General Assembly passed the bill overwhelmingly in 2020, after which the Governor of Maryland vetoed the bill, but both the House of Delegates and the Maryland Senate voted to override the veto. The Internet Freedom Act imposes the new tax on a sliding scale with the rate starting at 2.5% on annual gross receipts of $100 million to $1 billion and increasing up to 10% on gross receipts over $15 billion. Other states are interested in enacting similar taxes, including Montana, New York, Connecticut, Nebraska, and the District of Columbia.
CBO Budget Deficit Projections: The Congressional Budget Office released its annual assessment of the federal budget and economy for the next decade. CBO’s Budget and Economic Outlook: 2021 to 2031 predicts budget deficits will average 4.4 % of gross domestic product (GDP) over the next decade – from a high of 10.3% of GDP in FY 2021 to a low of 3.7% of GDP in fiscal 2026. That figure is one-third higher than the average 3.3% of GDP deficit registered over the past 50 years. According to the CBO, the projected current-year deficit of 10.3 % of GDP ($2.3 trillion) would be the second largest deficit since World War II, lower only than the 14.9% of GDP budget deficit of last year – 2020.
It is important to note, however, that the CBO assumptions are that all expiring tax provisions including nearly all of the individual tax changes from the 2017 tax law will not be renewed and that revenues will be higher as a result. If additional stimulus legislation is enacted, and if those temporary tax provisions are made permanent or extended, future deficits will likely be higher than these CBO projections.
Treasury and the IRS
Treasury Personnel and Policy Updates
The Treasury Department announced the appointment of several additional senior executives including Kimberly Clausing, Deputy Assistant Secretary for Tax Analysis; Itai Grinberg, Deputy Assistant Secretary for Multilateral Tax, Office of Tax Policy; Rebecca Kysar, Counselor to the Assistant Secretary, Office of Tax Policy; and Tom West, Deputy Assistant Secretary for Domestic Business Tax, Office of Tax Policy.
Treasury Secretary Yellen commented at a virtual conference that President Biden favors increasing taxes on companies to 28% and is open to considering increased capital gains rates, but does not favor a wealth tax, commenting that it has “implementation problems.” She also said that she plans to explore the rule that provides for a step-up in basis at death without the payment of taxes on the gains accrued over time.
COVID-19 Crisis Guidance & Related Issues
Tax Credits for Paid Sick and Family Leave: The IRS announced January 29th that it had updated the FAQ page on the refundable payroll tax credits for paid sick and family leave that were enacted in the Families First Coronavirus Response Act in March of 2020 and then extended and modified in the December 2020 Consolidated Appropriations Act, so that they are available through March 31, 2021. The credit generally are available to businesses and tax-exempt organization that have fewer than 500 employees and pay “qualified sick leave wages” and/or “qualified family leave wages” under the paid sick leave and paid family leave mandates enacted in the Families First Act.
Relief for FSAs and Dependent Care Plans: The IRS issued Notice 2021-15, which provides guidance on the application of special temporary rules for health flexible spending arrangements (FSAs) and dependent care assistance programs administered as section 125 cafeteria plans. The Notice also provides more time to implement the expansion under the CARES Act of allowed expenses for health FSAs and health reimbursement arrangements.
Other Issues and Guidance
IRS/2021 Filing Season: The 2021 tax filing season started on February 12, 2021. In announcing the start date, the IRS explained that the delay would give the agency time to do additional programming and testing of IRS systems following the tax law changes enacted in the 2020 year-end omnibus legislation. The IRS also announced that the Free File program is available to individuals and families who earned less than $72,000 in 2020. The IRS issued News Release 2021-23, which includes “important reminders before filing 2020 tax returns” covering issues such as the taxation of unemployment compensation, the home office deduction, and workers moving into the gig economy.
Despite the fact that the IRS delayed the start of the 2021 tax filing season, there are no plans to extend the tax filing deadline beyond April 15th generally for taxpayers. Several Democratic members of the Ways & Means Committee wrote to the IRS Commissioner asking the IRS to extend filing and payment deadlines for this year, but that request has been rejected.
The IRS has announced, however, that it will extend the filing and payment deadline for those taxpayers who are victims of the winter storms in Texas, who will now have until June 15, 2021 to file various individual and business tax returns and make tax payments. Following the disaster declaration issued by FEMA, the IRS is providing the relief to the entire state of Texas, but taxpayers in other states impacted by these winter storms that receive similar FEMA disaster declarations will automatically receive the same filing and payment relief. The relief covers individual and business returns normally due on April 15th as well as various 2020 business returns due on March 15th. Affected taxpayers will also have until June 15th to make 2020 IRA contributions. The June 15th deadline also applies to quarterly estimated income tax payments due on April 15th and the quarterly payroll and excise tax returns normally due on April 30th. It also applies to tax-exempt organizations, operating on a calendar-year basis, that have a 2020 return due on May 17th.
In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Individuals and businesses in a federally declared disaster area who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this case, the 2021 return normally filed next year) or the return for the prior year, which would be the 2020 return they are filing now.
OECD – Adoption of a Global Minimum Tax & Digital Taxation
The Inclusive Framework released new Blueprints for Pillars One and Two of the BEPS project on digital taxation and announced a new target date of mid-2021 for achieving consensus on the project, acknowledging that there is not yet agreement on the new rules. A public consultation meeting was held virtually on January 14-15, 2021, and a virtual meeting of the OECD/G20 Inclusive Framework was held on January 27-28th followed by a set of briefings on the tax and development work of the OECD on January 29th.
The US has been a key player in the OECD negotiations but, under the prior Administration, they became a party that created significant challenges to progress on reaching a global consensus. Although Treasury Secretary Yellen has expressed strong support for US multilateral economic engagement in the OECD talks and a global agreement, it will be necessary for Congress to be on board with the results. Congress will need to pass any measures necessary to implement a multilateral tax agreement. As currently drafted, the OECD proposals for taxing the digital economy would require Congressional action on several fronts, and the approval of legislation in the House with only a slim Democratic majority and the Senate with a 50-50 split will be challenging.
During the confirmation hearing of Adewale Adeyemo to be Deputy Treasury Secretary, the nominee stated that Treasury would work with other nations at the OECD to reach a fair agreement on digital tax issues. He said that “Treasury will engage in a multilateral negotiation that does not unfairly burden US companies, but rather creates a level playing field for competition.” Treasury Secretary Yellen has spoken with EU Trade Commissioner Valdis Dombrovskis about the ongoing OECD negotiations on a global tax reform agreement as well as a way to address EU-US trade disputes over DSTs.
The European Commission has published a so-called inception impact assessment and requested feedback on the design of an EU digital tax, which would be targeted to address the EU’s need for a modern, stable regulatory and tax framework to appropriately address the developments and challenges of the digital economy. This initiative appears to represent an overlap with the ongoing work of the OECD with the current timeline of the EU project expected to result in a directive in 2QW of 2021.
As part of the European Green Deal, the EU is considering instituting a carbon border adjustment mechanism (CBAM). A formal proposal is expected from the European Commission as early as the end of 2021 with the goal of implementing a CBAM by the end of 2022. The mechanism would impose a tax, or duty, on goods imported into the 27 member states of the EU, which would reflect the amount of carbon emissions attributed to their manufacture and inputs. Companies that export US-manufactured goods to EU countries are likely to be significantly affected by the CBAM, especially if their products are associated with high levels of carbon emissions.
The Council of the European Union released the Code of Conduct Group’s new work plan under the new Portuguese Presidency. The EU Code of Conduct Group monitors jurisdictions within the EU to determine if they cooperate from a tax standpoint. The new work plan provides for monitoring standstill, the implementation of rollback, and Member States’ compliance with the 2017 guidance on tax benefits related to special economic zones. The EU blacklist is also part of the work plan with plans for it to be revised by ECOFIN.
The Netherlands raised issues related to the US Foreign Account Tax Compliance Act (FATCA) at a recent meeting of EU finance ministers. The discussion included looking at the lack of reciprocity on information exchange between EU countries and the US and issues related to FATCA that pertain to US citizens who are also EU citizens. Under FATCA, countries exchange information with the US through bilateral agreements. Foreign banks must share information on US citizens’ accounts or face a 30% withholding tax on payments from the US.
The European Commission has asked the EU’s highest court to reimpose $15.7 billion in back taxes Ireland failed to collect from Apple due to deals Ireland made with the company to attract their business. The EC appeal states that the EU’s general court made errors of law and breached procedure in its ruling in July of 2020, which nullified the EC 2016 order that Ireland must claw back the money from Apple, and they now seek to overturn the 2020 decision. The appeal will be a key test for EU Competition Commissioner Margrethe Vestager, who has focused on using the bloc’s competition laws to go after aggressive tax planning by multinationals. The EC lost its original case against Apple as well as cases against Starbucks and other companies. Apple no longer uses the disputed tax planning method.